Competing in the Huge Digital Economies of China and India

Executive Summary

The global digital economy crossed an important milestone recently: the number of internet users in two countries — China, with just over 800 million users, and India, with 500 million users – surpassed the aggregate number of internet users across 37 OECD countries combined. While it’s tempting to group China and India together as a block of emerging digital markets, they offer several important distinctions, especially for international entities and countries looking to invest. Foreign companies looking to enter either of these markets will need to be prepared to navigate a digital landscape being actively shaped by the government. They will also have to contend with some difficult privacy issues; in China the rules of play on these issues are clearer, while in India the rules can change with political turnover, as well as the outcomes of legal challenges and citizen advocacy.

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The global digital economy crossed an important milestone recently: the number of internet users in two countries — China, with just over 800 million users, and India, with 500 million users – surpassed the aggregate number of internet users across 37 OECD countries combined. In both countries, users spend more time on the internet than the worldwide average of 5.9 hours per day. They also have room to grow; China has just under 60% of its population online, while India, with one of the lowest rates of internet penetration in the world, has under 25% of its population online.

While it’s tempting to group China and India together as a block of emerging digital markets, they offer several important distinctions, especially for international entities and countries looking to invest. In our Digital Evolution Index (DEI), we place them in the “digital south” which means the full deployment and adoption of online systems is still in development. Our DEI research classifies both China and India as “Break Out” countries, which means they are experiencing strong digital growth. China has 783 million smartphone users and, as reported by the Cyberspace Administration of China, had 469 million registered on a mobile payment platform in January 2017. It is also the world’s largest market for e-commerce. And India is on track to become the youngest country in the world by 2020 and its digital economy is expected to balloon from $413 billion today to $1 trillion dollars by 2025.

Both China and India present barriers to entry for foreign players. The most obvious distinction between the two markets is that China is mostly closed to international players because of state restrictions, while India is, technically, open for business. Top U.S. companies are investing heavily in India — as are Chinese companies, such as Alibaba and Tencent. However, India presents barriers that are less visible. Consider two examples:

Languages: Language poses a high barrier to entry or growth for any company. Less than 100 million out of India’s 700 million literate population can read or write English. There are 32 different languages with a million-plus speakers each across India, whereas in China, Mandarin is understood by the majority. In India, 90% of the country’s registered publications do not have a website because of language barriers and 95% of video consumption is in local languages. It is essential to crack at least five Indian languages to truly break into this market.

Protectionist policies: While China’s protectionist policies are transparent, India’s protectionist agenda is in the form of regulations and red tape. For example, a recently proposed Indian government policy on e-commerce and a similar order from the country’s central bank seeks to prohibit data on Indian e-commerce consumers from being stored outside India. Many international players view this as favoring homegrown digital companies and a case of India borrowing from China’s playbook, that mandates local storage of Chinese user data considered “sensitive”.

The few international players active in China have scaled the entry barriers through adaptive (and sometimes risky, complex, or controversial) strategies, while others that have been blocked – e.g. Google and Facebook – keep experimenting with ways to comply with the state restrictions and invite fresh controversies. In parallel, companies will need to tailor their approaches to fully crack India, but in different ways. Building on our example above, in response to the language barrier, Google has invested in its Translate app and in its AI-enabled multi-local language publishing platform while Amazon plans to launch in multiple local languages in India. Even for these giants, there is a long way to go.

Both China and India have governments deeply engaged in orchestrating the digital economy and in citizens’ data. It is well-known that China’s government has ambitious objectives for the country’s digital future. According to China scholar Adam Segal’s analysis, the Chinese President Xi Jinping “aims to build an ‘impregnable’ cyber-defense system, give itself a greater voice in Internet governance, foster more world-class companies, and lead the globe in advanced technologies.” Among its other ambitions, a July 2017 State Council document aims to position China as the world’s AI leader by 2025.

In the context of this agenda, the Chinese government is assembling a comprehensive database on its own citizens with help from Chinese technology companies that routinely synchronize with the government. The data will establish a social credit system expected to be both mandatory by 2020. Every Chinese citizen’s “social credit score”, drawing upon public and private data sources can determine what services – from no-deposit apartment rentals to booking airline tickets to dating to government services — are accessible to the citizen. The private sector, companies such as Alibaba – e.g. Sesame Credit, run by the Ant Financial, an Alibaba affiliate. — and Tencent, through its popular messaging platform, WeChat, have become enormous repositories of user data, with which they can better design and target new services, discern key user attributes, such as credit-worthiness, and train algorithms. They also help the government with necessary data and algorithms. This public-private collaboration not only helps serve the state objectives of citizen surveillance and preserve social order, but also produces user data that improves China’s AI capabilities.

Meanwhile, India’s government also has ambitious objectives for the country’s digital economy. Relative to its Chinese counterparts, India’s authorities have been focused on the fundamentals — on low-cost access to digital tools and on creating an open and inter-operable infrastructure. The country has embarked on a broad Digital India initiative that encompasses everything from broadband “highways” to e-governance to digital literacy. There are also plans to establish 100 “smart cities” across India in collaboration with public agencies and private companies.

Like China, India, too, has a citizens’ database. The aspirations for such a database were to establish a universally accepted form of identification to promote inclusive access to a variety of services in a country where many are excluded because of a lack of key documentation. As the core visionary behind this initiative, technology pioneer and Infosys co-founder, Nandan Nilekani, writes, the essential idea was to “empower users with the technical and legal tools required to take back control of their data.”

Nilekani led the initiative that produced such a system, Aadhaar, which has enrolled 1.2 billion citizens. Aadhaar has become the foundation for an “India stack”, the world’s largest API that allows any enterprise, private or public, to build services and linking them to each individual’s unique identity.

While each country has chosen a different path, both markets are being shaped by governments defining a framework and working with the private sector to populate it. Of course, state-organized citizen databases raise plenty of concerns. China’s social credit system raises worries about “Orwellian” mass surveillance. In addition, the growing use of facial recognition technologies across China adds to worries about privacy and government over-reach.

In India, Aadhaar had increasingly become mandatory for privately offered services, such as mobile communications, banking and airline bookings as well as government programs, triggering concerns from consumer privacy and advocacy groups. The Aadhaar database itself has not proven to be secure and there were worries about both commercial abuse of data and government surveillance of citizens. As in China, India has also entertained proposals to add facial recognition to the database. The mandatory aspect of Aadhaar was re-visited after being legally challenged and the country’s Supreme Court has ruled that while the ID system is constitutionally valid and is required as proof-of-identity for government programs, it cannot be mandated for private services, making it harder for companies to authenticate their customers.

Companies looking to enter either of these markets will need to be prepared to navigate a digital landscape being actively shaped by the government. They will also have to contend with some difficult privacy issues; in China the rules of play on these issues are clearer, while in India the rules can change with political turnover, as well as the outcomes of legal challenges and citizen advocacy.

Both China and India are key contributors to the world’s growing middle class. Currently, China is ahead on the major economic metrics: to add as much to its GDP as China will in 2018, India would need to grow by 40%. But there are other measures that suggest that India might have a chance to narrow the gap. India’s middle class (defined as $11 – $110 a day in 2011 purchasing power parity terms) is expected to exceed that of China’s by 2030, according to the OECD and Brookings. Simultaneously, India’s high growth rate of 7.7% in the first quarter of 2018, continues to maintain its position as the world’s fastest-growing large economy. Some India-enthusiasts argue that its demographic advantage and democratic political system will prove beneficial over the long-term in catching-up with state-controlled China.

China is ranked 36th and India 53rd out of the 60 countries ranked by our DEI. In light of the potential narrowing of the broader economic gaps, it makes sense to ask if the gap between the digital economies of the two countries might narrow. How long will it take for India to get to China’s current level of digital evolution? What key drivers might help accelerate the journey? Could India plausibly narrow the gap? These questions are important for companies that would rather pursue opportunities in India, rather than contend with the high barriers in China, but are concerned about how far behind India is relative to China.

First, if India were to pick up China’s momentum, it would reach China’s current level of digital evolution by 2029.

Second, if India could achieve 3% growth annually across several drivers, it could achieve China’s current level of digital momentum by 2022; these drivers are: physical infrastructure, government facilitation of the ICT sector, digital access, use of digital money and payments, national investment in R&D, gender digital inclusion, digital footprint of business, mobile internet gap.

Third, if India could accomplish the following combination of growth rates, it could reach China’s current state of digital evolution by 2024.

18% annual growth in Gender Digital Inclusion

3% annual growth in Physical Infrastructure

3% annual growth in national investment in R&D

1% growth in Digital Access Availability

This analysis suggests that narrowing the digital gap is within India’s reach. If international technology players and investors were to consider where they might intervene in India’s digital economy and provide leverage to the country’s policy objectives, they can participate in India’s digital economy while helping it accelerate and narrow the gap with China, a perennial economic rival. If this happens, India’s economy could even catch up to China’s. It is important for businesses, innovators, and policymakers to be aware of this potential for convergence between the two great powers of the digital south just as much as they see the differences in order to make wise strategic choices for approaching the two most essential digital markets in the world.